





  • Shelly Albaum

No Way Out: Law Firm Edition

In Which We Consider Elysium's Counsel

One of the nice things about having spent almost three years covering the ChromaDex-Elysium litigation here at Right of Assembly is that everybody in the world knows that this is THE place to come for litigation news. At least, the several hundred people who care about THIS litigation, which is mostly just employees of the two companies, their law firms, investors, and industry observers.

I get contacted. People send me praise, constructive criticism, and corrections (all most welcome!). People occasionally suggest issues that I should cover, or offer tips for legal events I did not notice. (Although nobody tipped me off to the Lift Stay Motion in Delaware!)

This week, though, I received a confidential tip from an apparently reliable source who wishes to remain anonymous.

So like all journalists who protect their sources (with the help of Shield Laws and the Reporters Privilege), I am not at liberty to tell you how I learned the following information.

The person told me that Elysium's law firm, Baker Hostetler had distributed a writing stating that,

"Pursuant to local rule 83-2.3.2, we hereby provide advance notice of our intention to file for a motion to withdraw as counsel for Elysium Health and Mark Morris. The basis for our withdrawal will be set forth in our motion to withdraw."

Well that would certainly be interesting if it were true.

First we are going to look at the local rule that is mentioned. Second, we will consider when law firms are allowed to withdraw as counsel for a client. Finally, we will speculate as to what it might mean, if true.

1. The Local Rule

The United States District Court for the Central District of California has a Local Rule numbered 83-2.3.2, which reads as follows:

L.R. 83-2.3.2 Motion for Withdrawal. An attorney may not withdraw as counsel except by leave of court. A motion for leave to withdraw must be made upon written notice given reasonably in advance to the client and to all other parties who have appeared in the action. The motion for leave to withdraw must be supported by good cause. Failure to pay agreed compensation is not necessarily sufficient to establish good cause.

So there are several things in this rule to unpack. First, once an attorney agrees to represent a client, they can't walk away unless there is good cause to do so. Second, the Court decides whether there is good cause. Third, the attorney must provide written notice to all parties BEFORE moving to withdraw. Fourth, failure to pay legal fees may or may not constitute good cause to withdraw.

So this alleged notice of which we are informed appears to be the "written notice given reasonably in advance to the client and to all other parties who have appeared in the action."

2. Good Cause for Withdrawal

Whether an attorney can stop representing a client depends not only upon the Court's rules, but is also governed by Rules of Professional Conduct and state statutes.

In California, Professional Conduct Rule 3-700 says that attorneys MUST withdraw if the client is bringing the action without cause and to harass, OR if continued representation will result in the violation of any rule of professional conduct, OR if the attorney's mental of physical condition prevents them from effectively representing the client.

Attorneys MAY withdraw if the client does one of a number of bad things, such as (1) insisting on a course of action that is inconsistent with the law or contrary to the attorney's judgment, (2) interfering with the attorney's ability to represent the client, or (3) not paying their attorney.

There are a few other grounds for permissive withdrawal that are perhaps less likely to apply in our situation, like inability to work with co-counsel; physical or mental disability; or if the client fires the attorney.

Even if one of those permissive conditions applies, the attorney is nonetheless prohibited from withdrawing until taking steps to avoid prejudicing the client's rights.

And even then, the attorney STILL needs to get the Court's approval.

In our situation, we have dispositive motions pending before the Court, and then evidentiary motions, and then trial. It would be difficult to withdraw under these circumstances without prejudicing the client.

The Central District of California has a Request for Withdrawal form (G-01) for attorneys to fill out, which conveys the distinct impression that you don't get to withdraw until after the client has retained new counsel.

Indeed, without new counsel, and with trial approaching, it seems that Elysium would necessarily be prejudiced by a withdrawal.

So if the alleged notice that we are reporting above is both real and serious, then Elysium would likely be seeking new counsel, or already have obtained it.

It seems to me that the most likely scenarios that could be motivating the alleged withdrawal notice would be (1) If Elysium fired Baker Hostetler; (2) If Elysium insisted on a course of action that Baker Hostetler thought unwise, or (3) If Elysium were not paying its bills.

I would be inclined to discount the first scenario, because if Elysium simply wanted to switch counsel they could probably accomplish that easily enough, and they might even have done so before a notice of intent to withdraw was drafted, let alone distributed.

The second scenario seems more plausible to me because I think that Elysium's litigation position has been on the edge of the law from the start. Specifically, I have argued that the Patent Misuse Claim, which Cooley has called "fictional," is not well-grounded in fact or law and is, therefore, potentially sanctionable. I also think that Elysium's mischaracterization in New York of this blog's approach to advertising also suggests Rule 11 jeopardy. But I would be genuinely surprised to learn that Baker Hostetler was getting cold feet about positions it had already committed to. And despite Elysium's past reprehensible behavior, there is no cause to assume that they are insisting on a future course of misconduct.

So that leaves me thinking that the most likely scenario would be if Elysium were unable to pay its bills.

Not farfetched. ChromaDex's legal bills have been running (Slide 15) just shy of a million dollars a month (on average $2.7M/quarter for the past 7 quarters, for a total of $19M since January 2018). If Elysium's bills are comparable, well, a million dollars a month adds up quick, especially if Elysium were in arrears for multiple quarters or worse.

We are into the realm of speculation, though. Elysium is a private company, so we don't know whether they are generating a million dollars a month in profits to fund their side of the litigation, or whether Elysium's prospects look so good that venture funders are eager to dump millions of dollars into the enterprise in exchange for a share of the treasures that Elysium might eventually win...perhaps...by getting credit for a discounted MFN price on its prior Niagen purchases and by invalidating ChromaDex's patents, and for false advertising damages in New York??? Or maybe some billionaire would invest in Elysium's litigation for sport or for purposes unknown? It's all speculation.

Case Law On Withdrawal

So let's assume for the sake of argument that Elysium has been unable to pay its bills, and this has gone on for long enough that a balance due has accrued that is so significant that Baker Hostetler has had time to provide warnings to Elysium, without resolution, and it has gotten to the point where it makes sense for Baker Hostetler to send the alleged notice required in the local rule in anticipation of filing an actual motion to withdraw.

Might Baker Hostetler actually be allowed to withdraw?

Such things happen. In fact, a similar situation was recently faced by -- of ALL the law firms in the world -- COOLEY! Yes, ChromaDex's own law firm found itself representing Elizabeth Holmes of Theranos in a massive 2016 class action lawsuit filed against her, Theranos, and Walgreens. Cooley's attorneys recently asked to withdraw on the grounds that the firm had "no expectation that Ms. Holmes will ever pay it for its services as her counsel." Apparently Cooley had been unpaid for a year.

Just last week, on November 5, 2019, U.S. District Judge H. Russel Holland approved Cooley's withdrawal.

Not every law firm is as fortunate.

In In re DVI, 2014 WL 5430998, a law firm was prohibited from withdrawing two months before trial until it arranged for representation of its client by other counsel.

So it is difficult to anticipate how such a matter might be resolved if it came before Judge Carney. On one hand, the amount of unpaid fees could potentially be massive; on the other hand, the litigation is complex and trial is imminent.

What Might This Mean?

It's also not crazy to suspect that Elysium might not be paying its legal bills. After all, this whole legal catastrophe started with Elysium refused to pay its bills to ChromaDex in the summer of 2016.

And Elysium's bad treatment of ChromaDex does not seem to have been a fluke. Through the deposition of someone (likely the CEO) at Elysium's first NR supplier, PCI, we learn that Elysium, "out of the blue on Labor Day sent an email telling [PCI] to stop all production," which caused unnecessary trouble for PCI.

Later in the same deposition came this exchange:

Q. Has Elysium always paid its bills on time?

A. No.

Q. Can you give me an example of when they have been late on a bill?

A. No, I can't. I have just heard that from my finance people that there were issues.

Q. Were those issues repeated?

A. I can't comment as to the frequency or how much.

Q. Was there more than one instance that you heard of?

A. From what I understand, yes, but they were resolved.

Let's also look at the timing of this alleged notice. We were very upset last month when Judge Carney took the trial off calendar, because we wanted to get to a jury, and we perceived Elysium as favoring delay.

But let's look at it from Baker Hostetler's point of view. We are six weeks from the close of the year. If they don't get paid soon, does that mean partner profits to be calculated at year-end are reduced by that amount? Would that make Baker Hostetler antsy to get Elysium out of arrears before year's end? Or would it make Baker Hostetler seasick about the prospect of an even more expensive trial weighing down 2020's results?

And why did Elysium's lead counsel, Joe Sacca, leave Skadden for Baker Hostetler anyway? According to the AmLaw list, Baker Hostetler is one of the top 60 law firms in the world -- extremely prestigious. But Skadden is one of the top 10. I thought nothing of it; I figured that Mr. Sacca was recruited for big bucks. But he also seems to have left Skadden without his team, because everyone else at Skadden withdrew from the case. When Baker Hostetler took over the case last year, the litigation was already almost two years old. Could it be that Elysium was already having trouble, and Baker Hostetler inherited a problem?

Or maybe there is no connection between the alleged notice and any of that, and Elysium has only recently run into trouble. Or perhaps Elysium has no financial issues at all, but wants to make arguments at trial that Baker Hostetler thinks it cannot. Or maybe Elysium does not like the instances of poor redaction we have seen, and they have already found replacement counsel. Or maybe the redaction problems resulted from Baker Hostetler feeling compelled to staff the matter lean.

Or maybe Elysium, having received a notice of intent to withdraw from its counsel, has found a way to make things right, and we will never see the filing of an actual Motion to Withdraw.

Or maybe the alleged notice of intent to withdraw is a fiction that never happened, and someone is pulling my leg.

Though honestly, of all the many things that this might be, I don't think it's that.

We probably will find out, though. Either a motion to with draw will be filed, and the grounds will be stated (and hopefully not redacted, or at least imperfectly redacted!), or no motion to withdraw will ever be filed, and we will know that this was all a mistake of some sort.

But JUST IN CASE it turns out that Elysium does have financial issues, and just in case those financial issues are not limited to legal fees and are coming to a head...If it so happens that we awake one morning to find ourselves fighting in a new forum -- Bankruptcy Court! -- you will be relieved to know that for two years I was the lead editor for West's Bankruptcy Newsletter. That means I stand ready to help us understand even the exotic legal terrain of the Bankruptcy Code, if necessary.

Hopefully for all concerned it does not come to that.

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